RESEARCH BRIEF:
Working Conditions, Productivity
and Profitability
Evidence from Better Work Vietnam
March 2015
The paper summarized in this brief contributes strong evidence
supporting the business case for better working conditions.
Recent research from the Better Work impact assessment in
Vietnam demonstrates profitability of garment factories increases
as working conditions improve. The boost in profitability is driven
by increased productivity among workers in better working
environments, and the financial benefit accrued by the factory
from this productivity improvement is shared with workers in the
•
Productivity gains that increase profitability of the factory are
shared with workers in the form of higher wages. Factories with
statistically significant better working conditions also offer
statistically significant higher wages, holding demographics,
hours and productivity constant.
•
Effective implementation of improved conditions among
workers is crucial to induce higher profitability. In contrast
to the worker perception finding, working conditions
improvements have only a mixed impact on profitability when
measured from the perspective of managers.
•
Higher productivity predicts a factory will have a better
form of higher wages.
I. SUMMARY OF KEY FINDINGS
Among apparel factories enrolled in Better Work Vietnam,
recent research finds profitability is significantly higher in
factories where there are better working conditions, greater
compliance with labour standards and more innovative human
resource management practices. Better working conditions
result in increased productivity among workers, which leads to
the improvement in profitability in these factories. Furthermore,
instead of suppressing wages, more profitable factories with
more productive workers also pay workers more. Recent research
combines data from compliance assessments conducted by Better
Work and from survey responses given directly by factory workers
and managers to yield the following results:
•
Factories experience a 5.9% boost in profitability when workers
perceive improvements in working conditions traditionally
associated with ‘sweatshops’ including improvements in their
sense of physical security and assurance in wage payments.
Similarly, profitability is 7.6% higher where workers experience
a comfortable environment and trusting workplace.
•
Greater compliance with labour standards is associated with
higher profitability.
•
Profitability improves in factories with better working
conditions because workers are more productive. Workers
in factories with better working conditions reach their daily
production targets up to 40 minutes faster than similar
workers who are working in factories with worse conditions.
•
In Better Work Vietnam factories studied, a 1% increase in
wage levels is associated with a 0.6% increase in revenues
relative to their costs.
position in the supply chain.
II. BACKGROUND
The global apparel sector has long been associated with harsh
working conditions characteristic of ‘sweatshops’. Apparel
workers in such factories often face the threat of workplace
injuries, low and unreliable pay, forced overtime hours and verbal
and physical abuse. These sweatshop conditions are often viewed
as the inevitable consequence of the fine division of labour
common in the early stages of industrialization in developing
countries, where global pressure drives apparel production in
pursuit of ever-lower costs.
A contrasting view suggests that sweatshop conditions in the
garment sector are not inevitable. Instead, poor conditions
persist because garment factory managers lack knowledge of
best-practices in human resources management – such as positive
motivational techniques or multi-dimensional pay packages – and
resort to strategies like verbal and physical abuse to elicit the
greatest effort from workers. A study examining management
operations supports this contrasting view. The study showed a 17
percent increase in productivity among a subset of Indian textile
firms whose managers received previously unavailable information
on international best-practice management techniques, such as
quality control and inventory tracking. Researchers conducting
the study found that information barriers had prevented these
factories from adopting such changes earlier. Similarly, other
studies have shown that human resources innovations, including
incentive and multi-dimensional pay, team work, communication
and problem-solving all increase productivity and profits.
BETTER WORK | ILO | IFC
Despite evidence that improved conditions can support business
operations, poor working conditions persist in the garment
industry. Unlike management innovations such as inventory
tracking, better management practices related to labour
conditions may not necessarily translate into better business
outcomes and higher profitability. For example, if factories
were previously able to coerce effort from workers through
harsh treatment and pay workers significantly below the value
factories received from that work effort, they may see no profit
advantage in moving away from a sweatshop model of operation.
Furthermore, factory managers may believe that the only way
to keep their firms profitable while meeting high-pressure time,
quality and cost demands of international buyers is through
coercing effort from workers through harsh treatment, low
pay and little to no investment in basic improvements in the
factory environment. With this mindset, using abuse or irregular
pay practices to maintain profits represent a “low road” to
development, in contrast to steps such as linking compensation to
work effort or implementing other human resources innovations.
The analysis summarized here investigates whether improving
human resource practices and factory working conditions can
compete with sweatshop practices to maximize business profits.
Using survey response data collected by independent research
teams from apparel workers and managers in Vietnam, as well
as data from Better Work compliance assessments, researchers
find that factories increase their profitability as they move away
from sweatshop conditions to more humane and innovative
labour management practices.
III. RESEARCH APPROACH
Better Work impact assessment surveys collect data on factory
characteristics, performance and workplace practices from
factory managers. Workers are surveyed on topics including
working conditions, hours, compensation and mental and physical
health. Better Work staff regularly complete unannounced
compliance assessment visits, where factories are assessed
for compliance with core international labour standards and
national labour laws. The data elicited directly from workers and
managers used in the current analysis were collected from 20102013 in apparel factories enrolled in Better Work Vietnam. More
than 5,100 workers in 185 factories provided responses.
Reserachers used factor analysis, a statistical technique
commonly used in social science research when compiling large
amounts of individual survey data, to analyze survey responses.
Factor analysis unites closely-related variables under a larger,
single ‘factor’ that captures the essential elements of the related
variables and represents the driving force behind relationships
of interest within the data.
Tables 1 and 2 show working conditions grouped into each factor,
from the perspective of workers and from the perspective of
HR managers, respectively. The first factor in the analysis of
worker responses is characterized by variables that represent
‘sweatshop’ working conditions: it includes conditions such as
verbal and physical abuse, dangerous workplaces and unreliable
payment of wages. A second factor includes variables that
are related to the factory environment. Finally, a third factor
combines variables that constitute a multi-dimensional pay
package, including benefits, bonuses and training. The working
conditions listed in each of the factors in Tables 1-2 are listed in
order of the relative weight they have on the factor.
Table 1. Factors for working conditions assessed by workers
Factor 1
“Sweatshop conditions”
Factor 2
“Working environment and trust”
Factor 3
“Multi-dimensional pay and benefits”
Accidents and Injuries
Physical Abuse
Verbal Abuse
Sexual Harassment
Excess Pay Deductions
Air Quality
Chemical Smells
Concern with faulty Punch Clock
Concern with Equipment Safety
Canteen Satisfaction
Restroom Satisfaction
Water Satisfaction
Clinic Treatment Quality
Approachability of trade union rep
Supervisor Fairness and Respect
Temperature
Excess Deductions
Low Wages
Bonuses
Benefits
Induction Training
Health Services
Pay Statement Information
Training in Last Six Months
Access to Drinking Water
Religious Obstacles to Promotion
Excess Pay Deductions
For HR managers, Factor 1 similarly relates to the harshest aspects of work. Issues related to pay emerge in Factor 2. Factor 3 captures
issues related to communication and problem solving.
Bloom, N.; Eifert, B.; Mahajan, A.; McKenzie, D.; and Roberts,
J. (2013) “Does Management Matter? Evidence from India”
Quarterly Journal of Economics 128(1): 1-51.
2 Bandiera, O. I. Barankay and I. Rasul. 2007. “Incentives for
Managers and Inequality Among Workers: Evidence from a
Firm-Level Experiment,” Quarterly Journal of Economics 122(2),
1
729-773;
Ichniowski, Casey, Shaw, Kathryn L. and Prennushi, Giovanna.
1995. The Effects of Human Resource Management Practices on
Productivity (November). NBER Working Paper Series, Vol w5333
BETTER WORK | ILO | IFC
Table 2. Factors for working conditions assessed by HR managers
Factor 1
“Sweatshop conditions”
Factor 2
“Pay practices”
Factor 3
“Communication and problem solving”
Sexual Harassment
Chemical smells
Equipment Safety
Physical Abuse
Poor Air Quality
Too much In-kind Compensation
Accidents
Concern with faulty Punch Clock
Late Wages
Excessive Deductions
Tet holiday Bonus
Low Wages
Late Wages
Excessive Deductions
Concern with faulty Punch Clock
Meal Allowance
Too much In-kind Compensation
Factory Temperature
Supervisor Skills Training
Verbal Abuse
Worker Committee Effectiveness Trade
Union Effectiveness
Worker Committees
Verbal Abuse
Induction Training
Factory Temperature
Supervisor Skills Training
Collective Bargaining Agreement
Tet holiday Bonus
Health Services
While the factors for workers and managers can be grouped into categories that are easy to classify, working conditions for analysis of
compliance assessments data do not fall into such neat categories. The exception for compliance assessment data is that Factor 3 can
be characterized by conditions related to communication and union rights.
IV. FINDINGS
Factories with more humane labour management practices
are more profitable. Factories experience a 5.9% boost in
profitability when workers perceive improvements in working
conditions traditionally associated with ‘sweatshops’ (factor 1),
including improvements in their sense of physical security and
assurance in wage payments. Similarly, factories do better when
they go beyond merely avoiding conditions associated with
sweatshops and instead create an environmentally comfortable
and trusting workplace (factor 2). Profitability is 7.6% higher
where workers are comfortable raising workplace concerns,
where workers express greater satisfaction with water and air
quality, and where there is greater satisfaction with restrooms,
canteens and health services provided in the factory, holding
other factors constant. Improvements in factor 3 – which is
related to multi-dimensional pay and benefits – also has a
positive impact on profitability.
Factories are more profitable if they are more compliant
with labour standards. While two of the factors used to analyze
compliance assessment data collected by Better Work enterprise
advisors produce mixed results on profitability, the third factor –
related to communication and union rights – shows a significant
and positive effect on profitability.
Better working conditions raise profitability by increasing
productivity among workers. To measure productivity, workers
are asked to report how long it takes them to reach their production
target on a typical Friday. Holding all other demographic and job
factors constant, as well as total hours, workers in factories that
have significantly better working conditions – particularly in the
area of working environment – reach their production target
nearly 40 minutes faster than workers in factories with relatively
worse conditions. In addition, as would be expected, multi-skilled
workers reach their production targets 30-40 minutes faster
than their unskilled counterparts.
Working conditions improvements from the perspective
of managers has mixed impact on profitability. Analysis
of manager responses shows that when managers perceive
improvements in the harshest conditions of work (factor 1),
profitability increases. However, when managers perceive
improvements in pay practices and communication (factors 2 and
3), profitability decreases. These results suggest that although
managers may believe improvements are being made in the
factory, if workers do not also perceive these improvements, the
positive benefits to profitability will not materialize.
More profitable factories pay higher wages than less
profitable factories. Factories need not sacrifice profitability to
pay decent wages. A 1% increase in wage levels is associated
with a 0.6% increase in revenues relative to their costs in Better
Work Vietnam factories.
Productivity gains that increase profitability of the factory
are shared with workers in the form of higher wages. One
could hypothesize that factories with better compliance with
working conditions could offer workers less in the form of
wages, thereby increasing profitability. In fact, the opposite is
seen in the Better Work Vietnam factories studied. Factories
with statistically significant better working conditions also offer
statistically significant higher wages, holding demographics,
hours, and productivity constant. Productivity gains from better
working conditions benefit both the factory, in the form of higher
profitability, and workers, in the form of higher wages.
Higher productivity predicts a factory will have a better
position in the supply chain. The higher the productivity
among workers, the more likely their factory will be a preferred
supplier to their most important customers. While productivity
has a clear impact on the supply chain position of a factory,
compliance with working conditions has a mixed impact on
supply chain position. In other words, the current evidence
available shows that compliance matters for the relationship
factories have with buyers through its impact on productivity.
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Higher worker productivity improves a factory’s position in the
supply chains with important buyers, and productivity can be
improved through improved compliance with labour standards.
V. CONCLUSIONS AND RECOMMENDATIONS
Current research undertaken by the impact assessment of Better
Work has found that the presence of better working conditions
predicts higher profitability in garment factories. Researchers
tested three hypothesized causal mechanisms for why
improved working conditions lead to improved factory financial
performance, as summarized in the following table.
Table 3.
Hypothesized mechanism for improved profitability
Current evidence
Better working conditions improves worker productivity?
Yes
Factories save costs by paying workers less in exchange for better working conditions?
No
Factories become more profitable by improving supply chain position?
Yes, through improved worker
productivity
Researchers find that workers in factories with more compliant
and better working conditions are more productive than
their otherwise similar counterparts, which leads to greater
profitability. In addition, factories that gain financially from
more productive workers do not lower wages in exchange for
better working conditions. Finally, although evidence is mixed
that greater compliance leads directly to a better supply chain
position, as a factory’s workers become more productive, its
supply chain position improves.
For full results, see: Brown, Drusilla; Domat George; Veeraragoo,
Selven; Dehejia, Rajeev; Robertson, Raymond (2014) “Are
Sweatshops Profit-Maximizing? Answer: No. Evidence from
Better Work Vietnam,” Better Work Discussion Paper no.17
Core donors to Better Work are:
Netherlands Ministry of Foreign Affairs
Swiss State Secretariat for Economic Affairs
Ministry of Foreign Affairs of Denmark The US
Department of Labor
Funding is also provided by DFID, Government
of France, Government of Canada, Irish Aid,
GMAC, Royal Government of Cambodia and
private sector donors,including The Walt
Disney Company, Levi Strauss Foundation,
Gap Inc. and FUNG (1937) Management Ltd